Chapter Three
Collectibles as Investments
Beauty in the Eye of the Marketplace
Perhaps you expect that your authors will be uncritical cheerleaders for alternative investments. Far from it. We’re going to prove that by getting tough on some categories of alternatives that we think you should avoid. The first one of these is collectibles.
During times of economic dislocation—when people lose faith in conventional instruments like stocks, and bonds—investment dollars are often allocated to various unconventional vehicles. A mysterious and fervent devotion attaches itself to rare collectible items like watches, art, coins, stamps, books, jewels, antiques, wine, rugs, horses, paintings, carpets, sports memorabilia, automobiles, and various similar exotica. This can happen in good times, too.
Throughout history, people have sought to hedge themselves against national financial disaster by carrying off and hoarding beautiful relics. In his Decline and Fall of the Roman Empire (or was it the movie Gladiator, we don’t remember), Edward Gibbon notes that when pitiful Romans fled their cities under the barbarian onslaught, they took with them statuary, mosaics, and tapestries in the hope that they could be exchanged for far more than the thoroughly debased Roman currency. Similar things happened in the South during the American Civil War, and after the World War II in Europe, as the defeated countries found that their currencies were worthless.
Devoted students and collectors in many different fields have discovered that they can turn their love affairs with various tangible items into cash. Men and women who have dedicated their lives to learning the most minute details of recondite fields occasionally can find that their skill and time have given them valuable assets. That said, the basic story on collectibles is this: Collect for love, not for money.
The basic story on collectibles is this: Collect for love, not for money.
There are enormous drawbacks to collecting as a financial endeavor. As P. T. Barnum said, there is a sucker born every minute and two to take him. The country is crawling with fast-buck Freddies trying to convince the many suckers of our age that collecting is easy, fun, and profitable.
So, here are a few rules from one sucker to another.
Rule One: If it is advertised in a mass-circulation journal as rare and important and potentially valuable, stay away, unless you like it for its own sake.
Items that specifically are made to be collectible almost never are. That special commemorative medal struck by Acme Tool & Die we bought to commemorate the inauguration of Vice-President Joe Biden? Turns out, it’s not that valuable—even though it was advertised in TV Guide. Things like this have no intrinsic value except to make money for the manufacturer. There is rarely a secondary market because they were not that rare, precious, or beautiful in the first place.
Rule Two: Collecting goes in fads.
Around the turn of the twentieth century there were crazes for collecting medieval manuscripts. J.P. Morgan and other tycoons collected illuminated manuscripts and other exotic books from all over the world. Staggering prices were paid for them until the early 1920s. Then the fad abruptly disappeared. Today, those manuscripts will barely fetch the prices they reached 85 years ago. The same has been true of Italian marble statuary. Much beloved in the Roaring Twenties and into the 1930s, it has never returned even what it was selling for during the Great Depression. All those medieval manuscripts in your study and marble statues in your garden? They probably aren’t worth as much as you thought. Sorry.
Because collectibles generally have little intrinsic value, only people’s wishes make them come true. When the fashion passes, the collector is left with a drawer full of old PEZ dispensers or whatever seemed so desirable at the time. In that sense, collectibles are like chain letters. As long as the chain keeps going, everyone is fine. But when the chain stops, the last person who paid out the money is in trouble. Beware of fads unless you are deeply in love with the faddish item and do not care what other people think about it or about making money on it.
Rule Three: Beware of thinly traded markets.
The market for collectibles can be about as liquid as the market for stolen Vermeers. To find oneself at an art auction, whipped into a frenzy of enthusiasm and confidence that a certain item will make you rich and happy, is one thing. The auctioneer will cheerfully accept your money and congratulate you as he hands over the painting and moves on to the next item on the block.
To try to get your money out at the other end is a horse of a different color. When the time comes to sell, you will have to essay the haphazard methods traditionally associated with selling a used car.
Rule Four: If you cannot afford to be patient, either financially or temperamentally, find another hobby.
Collectibles can be subject to wild swings in value even when they are in constant demand. They do not diversify the rest of your investments, because their prices are highest precisely when stock markets are bubbling. Then, since collectibles are the epitome of discretionary expenditures, they are the first to be dispensed with during hard times. As “high beta” objects whose price swings amplify market moves, they should be held in the smallest of quantities, if at all, and by people who will never have to sell them to raise money. Therefore, our basic guidance on collectibles is to discourage collecting for purely speculative reasons. Yes, lovers of beauty and lifetime aficionados of even the most esoteric items do stand to make money. In the world of Louis XVI clock collectors, there are profits to be made by the Louis XVI clock collector who knows what time it is. However, the true collector will derive immense psychic pleasure—the most important kind—whether his object pays off in cash or not.
Our delight in all things collectible is going to be sullied by having to buy and sell said items. When it comes to buying a collectible, you will always pay retail. Even if you are told that you are not paying retail, you still will be paying retail, and that is a lot more than wholesale. In other words, you will be buying high and selling low. If you must insist on collecting with any thought of financial return, try to inform yourself how you will dispose of your bijou once the time comes. Never rely on what the smiling salesperson tells you as he rings the cash register. If it were so valuable, with such effortless profit potential, why would he sell it to you?
When the time does come to sell, you can try advertisements in the appropriate journals or consignment to auctioneers. You can sell it directly to a dealer. You can list it on eBay or on some specialized auction site devoted to your hobby. In any case, be prepared for a shock. Unless you as a collector are also proprietor of a gallery, you can completely forget about getting the retail price of your bauble. Even though art magazines or friends tell you your collectible has increased in value, this will not prove to be the case when you try to sell it. You will find the private auctioneer takes a generous cut of whatever your objet d’art fetches. Moreover, even the best, most prestigious auctioneers will not always be able to sell your beloved item at once.
Exception: If you can get yourself elected trustee of a museum—a select bunch of bananas, to be sure—you can use the position to lobby for exhibitions for whoever the flavor-of-the-month is that you and your curators have been collecting lately. Don’t forget to hire an art history Ph.D. student to write some mumbo-jumbo for the catalog—that will really add class. Then you and your pals can liquidate your holdings at a tidy profit.
We fear that PBS’s Antiques Roadshow gives viewers a misleading impression of the easy money to be made trafficking in collectibles. Their appraisers always tell people the insurance value or the replacement value of the gewgaw they have hauled in, or what it might fetch in some ideal auction before expenses (for some reason, it’s always $5,000). What they don’t say is what they, the knowledgeable dealer, would pay for it in cash money right there and then on the spot, or what we might call the actual value. That would be the revelation.
It’s always fun to watch the delight on the face of somebody who paid $250 for a painting in 1950 when he discovers that it’s supposedly worth $5,000 today. What this scenario doesn’t show is the opportunity cost: If he’d just put that same $250 in the stock market in 1950, he’d have $130,000 today. Then again, maybe he extracted $125,000 worth of enjoyment from having it sit in his attic. Pride of ownership can be difficult to quantify.
eBay has created its own set of perturbations to the collectibles market. Initially, the net effect was to drive down the price of many items, as people discovered that there were more first editions of Slaughterhouse Five around than they were led to believe by ye olde rare book dealer with the one moldy copy on his shelf. However, bringing more liquidity to what was once an entirely dealer-rigged market, and inserting more anonymity and distance into the process, has also exacerbated preexisting conditions, such as fraud. Is that Rolex real, or is it a fake? What about that Ernie Banks baseball card? Or that 1957 Gibson Les Paul guitar? Is it even possible any longer to tell an expert reproduction from an original? If it is, and if you can’t, how are you going to find the someone who can? The field is full of unscrupulous operators and charlatans at every level; if Sotheby’s and Christie’s can conspire to fix prices (the “tone at the top”), look out below.
All these perils will become clearer if we take one collectible as a case study. Let’s take classic cars.
Wouldn’t it be cool to drive a red 1957 gull-wing Mercedes 300SL? Girls would be checking you out up and down the strip, plus it would be a blast to drive, plus it would go up in value year after year. It would be like getting paid to have fun and be popular. It would even subsidize your transportation budget.
That’s the dream. The reality is different.
The only correct way to assess the prices of cars would be to measure the price set by the forces of supply and demand. In other words, people who sold their cars at auction without a reserve price (a price below which they will not sell but instead take their buggy and go home) would get a true gauge of prices. However, almost no cars are sold at auction without reserve prices being set for them. The most foolish seller is not so foolish as to offer to sell without requiring that a certain price be reached. At many exotic car auctions more than half of the cars do not fetch their reserve.
Second, a prevalent way of “establishing” the price of a collector’s car is fraught with deceit. Most collectible cars are exchanged through private sales, either between individuals or with a dealer acting on one side as principal or agent. Accurate price information on the cars in these trades is impossible to obtain. Collectors are usually close-mouthed about the price of a car, wishing to hide either embarrassment or taxable income. Dealers naturally want to conceal costs as well as their own profits.
Many of these trades involve groups of exotic cars. Suppose three fairly exotic cars are exchanged for one very exotic car. Then the parties to the trade, if they are in a publicity-seeking mood, may tell an auto magazine that their cars sold for $300,000 for the most exotic car and an average of $100,000 per for the rather less exotic cars. But who knows if those are the true prices? The parties can assign the price arbitrarily.
Another pitfall for unwary buyers is the failure to distinguish between real price and nominal price. The real price is the price adjusted for inflation. Porsches in good condition dating from the 1960s sell for far more today than what they cost when new, which sounds good until we realize that a loaf of bread today sells for more than seven times more than one did in the 1960s. So does almost everything else, on average. Taking the price of an item in dollars unadjusted for inflation is meaningless. Even if you are buying a car that is an exception to this rule (which is to say you are paying an exceptionally high price for the car), you have to hope that the price keeps on being exceptional. That outcome is not inevitable. The price could also regress to the mean as some other type of car suddenly becomes more fashionable than yours.
Oh, and did we mention that you have to restore the car? A typical restoration job takes about 800 hours and a couple of years at a custom garage. You know how you always wonder if Sven is ripping you off when he fixes your wife’s Volvo? Add another zero. These guys are going to become like family, but not necessarily in a good way. Those vintage, original equipment manufacturer parts you need? You will need a second mortgage to afford them.
One more thing: Classic cars were designed before the aid of computers. Their handling compares to a wheelbarrow. A Honda Civic will smoke them through the twists and turns. They don’t work well, the radios are horrible, the heaters, ditto, electrical, ditto, forget about A/C, and as far as safety equipment goes, you’re lucky if they have seat belts. We once complained about the radio in an old car. The dealer informed us, “You have to understand—Mercedes thinks of the radio as a way to communicate troop movements.” There’s a good reason why they don’t make them anymore. The design is unmatched, but that is all.
It is not easy to convert money into beauty and then back into money again.
In summary, no one without a generation’s experience in dealing with exotic cars should expect to escape disaster collecting cars for profit. But if the investor loves his car and derives great satisfaction from riding in it and watching the envious stares, if he does not begrudge the months his car will spend in the clutches of mechanics and body molders, then he will be all right no matter what. It makes sense for someone like Jay Leno to collect cars. It makes less sense for most of the rest of us.
The Alternative Reality
Here is the takeaway you can stitch into an antique sampler: It is not easy to convert money into beauty and then back into money again. As a songwriter once wrote (in another context), if you’re gonna do it, do it for love.
If you decide to indulge anyway, remember that buying and selling collectibles will exaggerate trends already in evidence in the rest of the economy. When the stock market is hot, modern artists will fetch record prices. When we’re in a recession, prices of collectibles will be the first to fall. They don’t diversify the rest of your holdings or hedge anything.
Lest you think we are singling out collectibles, there are plenty of other alternative investments we aren’t going to be recommending anytime soon, as you will see in the next chapter.